SINGAPORE (June 10): DBS Group Research analysts Rachel Tan and Derek Tan have maintained their “buy” calls on OUE Commercial REIT (OUE C-REIT) with a lower target price of 50 cents from its previous 60 cents.
In a Monday report, both analysts feel that the REIT offers an attractive value proposition at its current 6.3-6.6% FY20F-FY21F yield, 0.65x price to net asset value (P/NAV), and -2SD following Singapore’s gradual re-opening after its circuit breaker measures.
This comes as consensus has placed a “hold” call on the REIT for its exposure to the retail and hospitality portfolio, which directly suffered from the impact of Covid-19. The retail and hospitality portfolio comprises some 40% of OUE C-REIT’s group revenue.
“While we may be early in our positive call, given the attractive valuations, we believe the worst is over with the start of phased reopening and progressive relaxation of travelling between certain countries,” they share.
Despite the slowdown in leasing activities in its Singapore portfolio, the REIT can expect positive rental reversions at a mid-to-high single digit.
The REIT’s Grade A commercial assets in the Central Business District (CBD) allows it to charge higher rents, and an edge in attracting and retaining tenants during market downturns.
OUE C-REIT’s income also continues to be supported by minimum rent support, especially from its hospitality portfolio and OUE Downtown, by its sponsor OUE Ltd.
However, the REIT will still have to look out for a slower-than-expected demand for its offices, a slower-than-expected recovery, and its $375 million outstanding convertible perpetual preferred units (CPPUs).
The CPPUs were originally issued to fund the acquisition of ORP with some 524 million OUE C-REIT units. The REIT currently has about 2.88 billion units outstanding.
“With OUECT’s share price currently below the CPPU conversion price, we believe there is limited conversion risk in the near term,” the analysts say.
On May 5, OUE C-REIT declared a distributable income of $37.6 million for 1Q2020 ended March, a 44.5% increase y-o-y from last year’s $26.0 million.
As at 9.54am, units in OUE C-REIT are changing hands 2.4% up, at 42.5 cents.
